Alameda's Cable Conundrum

The pending disposition of the city's troubled cable TV system may go down as the largest financial disaster in city history

Kevin Kennedy doesn't think of himself as a whistleblower. Nor is the financial planner prone to saying "I told you so." It's counterproductive, he says.

But following a joint Alameda City Council and Public Utilities Board meeting in February 2006 at which the elected city treasurer just happened to focus on an obscure footnote at the bottom of a PowerPoint slide during the meeting, he started asking questions about Alameda Power & Telecom's nascent cable TV system and its financial health. When he didn't get immediate answers to his questions and was delayed in getting copies of requested reports, he started asking the same questions publicly, sometimes in meetings with local newspapers.

As it turned out, he and City Auditor Kevin Kearney were the only public officials to speak out on what many believe will be the biggest finance debacle in Alameda's 154-year incorporated history. Sometime before the end of this year, the city may write the final chapter in the history of the utility's troubled cable and Internet division, likely by selling the system and in the process losing close to $80 million in ratepayer and taxpayer money.

"I can tell you sincerely that I wish I hadn't been right," Kennedy, 41, said during a recent interview. "What continues to concern me is that I wonder exactly how far does a person have to go before people start listening?"

Like other municipalities across the nation, Alameda became interested in the cable business following the 1996 deregulation of the telecom industry. Soon thereafter, the idea of Alameda owning and operating its own cable TV system began to circulate around city hall. That gave birth to a ballot proposition that city voters narrowly approved two years later.

People who voted for the 1998 proposition say they distinctly remember proponents swearing that an economic "firewall" would separate the fledgling cable start-up from the financially flush Bureau of Electricity, which traces its roots back to 1886. Voters were told that the telecom project would be financed with funds from bond sales and that the project would quickly pay for itself in just a few years.

While members of the city council, utilities board, and AP&T staff would later debate exactly what these assurances meant, it was clear from almost the beginning that any firewall between the electric utility and the cable system was more rhetorical than financial. After all, as early as 1996, the utility already had built a fiber-optic system — ostensibly to help manage its electrical power system but also as the backbone of what officials anticipated would eventually be a cable TV system.

The city and the Bureau of Electricity (the predecessor agency to AP&T) began construction on the system in 1999. By 2000, AP&T began "loaning" its cable start-up millions of dollars from the electric division — all in apparent contravention of what voters were promised.

The money initially was transferred in small amounts but then increasingly grew in scope. From 2003 to 2004 alone, $11.4 million was given to the cable project. The problem with these so-called "interfund advances" — which totaled $43.6 million as of last year according to records — is that they were never made a part of the public debate. In fact, until Kennedy and Kearney started talking about the loans, very few people knew anything about them.

Even in late 2000 and early 2001, as the telecom bubble was bursting, AP&T continued with its construction efforts. Across the bay in Palo Alto, which had been building its own fiber optic-based cable system, officials abruptly stopped work on their project, apparently seeing the financial handwriting on the wall.

In July 2001, construction on Alameda's system reached the point where cable services could be offered to a few initial customers. A year later, the system had 5,000 subscribers. In June 2005, construction on the project was declared complete and the utility claimed it had 15,000 subscribers, some 5,000 of whom were getting Internet-only services.

And while the cable division continued to be propped up by the electric division's loans, the initial construction bonds were coming due and had to be refinanced. As a result, the division's total bonded debt grew to $33 million, with a balloon payment in June 2009.

While observers argue about why this series of events unfolded as it did, what has become clear is that a nearly blind faith in the cable division's ultimate success pervaded the ranks of the utility board and city management. They were sure that the city's foray into the cable business would be lauded as an example of forward-thinking municipal governance.

But in the summer of 2006, partially in response to the concerns expressed by Kennedy and Kearney and by the growing media coverage, the utilities board hired a consultant to get an outsider's perspective on the situation. The board's consultant recommended that AP&T do several things, including slashing its municipal workforce and adding telephone service to its lineup of programs and services.

The board eventually held two large, well-attended community meetings in January 2007, at which it got its first direct taste of the public's displeasure with the situation. Following those meetings, the board ditched the telephone proposal but did implement many of the consultant's other recommendations. This allowed the utility to begin seeing operating revenues slowly match expenses on a year-over-year basis.

And while the whole issue slowly drifted back under the public's radar for the bulk of 2007, it began to sink in to utility board members and city hall management that the long-term bonded debt was acting like an ever-tightening noose around their necks. Realizing that they had far more questions than answers, in late 2007 the utilities board hired a cadre of outside experts to help them study the crisis.

When this second group of experts returned to the board in February with its initial findings, its report was downright bleak. Led by San Rafael-based Northcross, Hill & Ach, Inc. and New York-based Waller Capital Partners, the group presented the Public Utilities Board with three options:

1) Keep the system and try to refinance the wilting $33 million bond balloon payment before it comes due in June 2009;